Annex_2_KOS_038_RCE_IEE.pdf

DCN: 2018-KOS-038

USAID/Kosovo Economic Governance 1 EE.BEU Standard Form: RCE.v3

SOP 1, Template 2: Request for Categorical Exclusion (RCE)

United States Agency for International Development (USAID) Kosovo

Request for Categorical Exclusion (RCE)

Program/Project/Activity Data:

Activity/Project Name: Economic Governance Activity

Assistance Objective: Increased Investment and Private Sector Employment

Program Area: Private Sector Competitiveness

Country(ies) and/or Operating Unit: Kosovo Originating Office: EGO Date: April 18, 2018 PAD Level RCE: Yes No RCE/IEE Amendment: Yes No Supplemental RCE: Yes No

DCN of Original RCE/IEE:

DCN of Amendment(s):

If Yes, Purpose of Amendment:

DCN(s) of Related EA/IEE/RCE/ER(s):

Implementation Start/End: AMD: FY-FY LOP: FY 18 – FY 23

Funding Amount: AMD: $ 12 million LOP Amount: $ tbd

Contract/Award Number (if known): tbd

Recommended Determination: Categorical Exclusion

Additional Elements:

Government to Government: Local Procurement: Donor Co-Funded:

1. Project and Activity Description

1.1 Purpose and Scope of RCE – The purpose of this document, in accordance with Title 22, Code of Federal Regulations, Part 216 (22CFR216), is to provide a preliminary review of the reasonably foreseeable effects on the environment of the new Economic Governance activity described herein and recommended actions and, as appropriate, conditions, for these activities. The Economic Governance activity is a five-year endeavor focused on strengthening economic governance to reduce opportunities for and public perception of corruption. This is expected to contribute to increased investment and economic growth in Kosovo.

1.2 Project Overview - Kosovo’s economy is underdeveloped. Even historically, it served as an exporter of low-value-added products, and in the Yugoslav era, efforts at industrial development were limited.

Stagnation of industrial production and post-war reconstruction turned Kosovo into an import-dependent economy with a very large trade deficit, financed in part through foreign assistance and remittances. Since independence, Kosovo has not structurally transformed its manufacturing or service sectors. In addition, its infrastructure was badly damaged following the dissolution of Yugoslavia and the fight for independence.

USAID/Kosovo Economic Governance 2

However, with partners’ support Kosovo has taken incredible strides in economic reform, demonstrating progress which, in many areas, outstrips its Western Balkan neighbors. In the last 10 years, Kosovo has made significant progress in the areas of macroeconomic stability and business regulatory reform by adopting significant formal limitations on governmental spending, streamlining and automating certain taxation processes, and reaching a rank of 40 out of 190 economies on the World Bank Doing Business Report (up from a ranking of 126 in 2012).

While these changes have had substantial effect, the rate of economic growth has not changed appreciably. It should be noted that economic growth is influenced by many factors other than a country’s public financial management and legal and regulatory environment including, for example:

exogenous political obstacles, infrastructure, and education and workforce development. In addition, Kosovo’s economic reforms have taken place in a backdrop of the institutional “blank slate” the country faced post-conflict and prior to the independence process. As such, the country’s impressive progress has not resulted in the necessary economic and job growth.

Over the past decade, the GOK has made significant progress in establishing and consolidating governing institutions; however, in many cases, access to economic and political opportunities continue to flow through informal networks of power. This situation is beginning to change as public pressure to fight corruption grows and fiscal space for expanding patronage networks is increasingly limited. These institutional issues may explain why the perception of corruption among businesses is outsized to the corruption encountered; for example, in a recent survey among Kosovar businesses published by the American Chamber of Commerce in Kosovo, 98% of respondents identified corruption as a “very pressing” or “important” issue, while 48% reported having directly encountered a specific incidence of corruption in the course of business.

As a country with geographic, political, and economic challenges, Kosovo starts with a significant disadvantage in the competition for investment. It is all the more important, therefore, for Kosovo to demonstrate commitment to meeting its obligations under the SAA and progress towards integration with other international institutions which promote good governance and a hostile environment for corruption, such as the WTO. Doing so will create the conditions for businesses to grow and prosper.

2. Project Description and Climate Risk Screening – The purpose of the Activity is to strengthen economic governance to reduce opportunities for and public perception of corruption. This is expected to contribute to increased investment and economic growth in Kosovo.

The Activity objectives below are closely related and it is expected that some interventions will address more than one. The Contractor will seek to consolidate and learn from earlier gains addressed under the Partnerships for Development (PfD) activity which closely relate to this Activity’s objectives; however, the Activity is not a continuation or replication of PfD.

In developing areas of focus and interventions to achieve the expected results, the Contractor must employ a flexible, demand-driven approach that builds on consultations with all stakeholders, including those in the private sector, and USAID. While USAID has identified some particular areas and issues of focus as current priorities within each objective, the operating environment for this type of assistance is unpredictable and may necessitate changes. Thus, the Activity must practice adaptive management of the

USAID/Kosovo Economic Governance 3

Activity to in order to seize new opportunities and adjust to challenges as they develop. For additional details, see Section C.6 “Continuous Learning and Adaptation.”

This Activity may be implemented simultaneously with one or more other economic anti-corruption activities, and must be closely coordinating with those activities in working toward shared goals. All of the Contractor’s interventions in the performance of this SOW must be approved by the Contracting Officer’s Representative (COR) via the annual work plan (AWP). The AWP is a living document and can be amended on an as needed basis with the approval of the COR.

OBJECTIVE 1: IMPROVED BUSINESS ENABLING ENVIRONMENT

This objective will expand the advances Kosovo has made to improve its business environment, demonstrated by improved rankings in international surveys such as World Bank’s Doing Business Report and others. In addition, the Contractor must seek to build institutional policy development and intergovernmental coordination, and further strengthen the transparency, efficiency, and accountability of the regulatory requirements for doing business applied to businesses at both national and sub-national levels. Potential Doing Business areas of focus for the Activity are Registering a Property, Paying Taxes, Protecting Minority Investors, Starting a Business and Trading Across Borders. The Contractor must work with the Ministry for Trade and Industry, or MTI, (in coordination with anticipated World Bank programming) to support the reform of Kosovo’s inspections system; MTI has specifically identified a current need for USAID support in the area of market surveillance (consumer protection). In addition, the Contractor must support (in coordination with anticipated EU programming) increasing the capacity of the Government of Kosovo to improve the legislation, regulation, and/or procedures associated with cross-border trade, in alignment with the EU acquis and WTO principles.

There are some areas where consolidation of previous progress is needed. With the support of PfD, the Ministry of Environment and Spatial Planning (MESP) made significant progress in the legalization of constructions without permit, as well as further advancing construction and spatial planning reforms (in particular, construction permitting, which constituted Kosovo’s lowest ranking among the Doing Business indicators). Building on these advances, the Contractor must support the implementation of legalization of unpermitted construction (once it is passed). Other current priorities within the regulatory and inspection environment include: the implementation of reforms in construction permitting (primarily at the municipal level) to reduce uncertainty and opportunities for corruption around where businesses and individuals can build and increase business use of property as collateral for access to finance, supporting MTI with the implementation of the new Law on Business Organizations, and working with the MoF and MTI to provide support on the implementation of the anticipated new trade legislation. The Contractor may find USAID’s Municipal Competitiveness Index (MCI) as a valuable resource to identify areas of resistance to reform at a sub-national level.

USAID/Kosovo Economic Governance 4

Expected Results:

● Strengthened regulatory and inspection environment;

● Increased transparency, efficiency, and accountability in implementing and carrying out commercial rules, regulations and laws;

● Expanded legalization of unpermitted buildings;1 and

● Improved trade regime in alignment with EU acquis and WTO principles.

OBJECTIVE 2: STRENGTHENED PUBLIC FINANCIAL MANAGEMENT

This component will continue and expand the advances Kosovo has made to improve its budgeting and public financial management practices. The Contractor must assist the Government of Kosovo to improve and sustain macroeconomic and tax policy, maintain and extend improvements in public financial management, and ensure overall macroeconomic and fiscal stability. This includes supporting central and municipal levels of government in assessing and realizing opportunities for private sector investment in priority social services and infrastructure to accelerate economic growth. It is important to link financial management with any reforms in licensing, permitting, and taxation to ensure that adequate revenue is planned and realized while reforms in the business environment are implemented that may temporarily decrease traditional revenue streams (such as the reforms in Value Added Tax (VAT) administration, the elimination of non-cost-recovery-based fees, and potential tariff reductions).

The Contractor must support the streamlining and improvement of Kosovo’s tax collection processes (working with the Tax Administration authority of MoF, or TAK, and in coordination with GiZ’s ongoing assistance in this area), including the integration of risk management systems to reduce the burden of compliance on businesses, and reforming TAK to employ outcome performance management. The Contractor must provide technical assistance to senior government officials responsible for macroeconomic and fiscal stability (e.g., MoF, MTI, Tax Administration (TAK), and Municipal Governments). Current priorities include Kosovo’s improved but not yet adequate budget planning and accounting capacities, the anticipated reform of VAT, and the improved policy and regulation of non-tax revenue.

Expected Results:

● Strengthened MOF institutional capacity to carry-out budgeting, forecasting, planning and budget execution so they can execute these functions independently;

● Functional compliance risk management (CRM) providing increased confidence in TAK functions and reduced burden on businesses;

● Reformed, more effective TAK organizational structure, including an outcome-based performance management system; and

● Improved legal framework and implementation of VAT policy.

1 This result is complementary to and not redundant to any other USAID applicable activities, USAID/Kosovo Economic Governance 5

OBJECTIVE 3, CROSS-CUTTING: ENHANCED STRATEGIC COMMUNICATION

The reforms Kosovo will need to undertake to build a foundation for broad-based, sustainable economic growth will be politically difficult to develop and implement, and will require implementation by some actors with adverse incentives. Thus, collecting and utilizing public support and pressure through the development of an inclusive process that engages interested stakeholders in identifying key constraints to private sector growth is crucial. Attention to the development of a clear legal and regulatory framework that achieves its objectives at reasonable cost for the benefit it provides to the private sector, enables all actors to clearly understand the rules within which they must operate, and is capable of evolving over time based on changing needs, circumstances and commitments, will also be critical.

A successful policy reform lifecycle in a healthy market economy would likely involve five components:

(1) identifying issues and solutions; (2) lobbying and advocacy; (3) mechanisms for public private dialogue; (4) policy, law, and regulation; and (5) implementation. Strategic communication will generate momentum from planning through implementation stages for structural and regulatory reform, as well as promoting utilization of the reformed environment and public support for continued reform. Following the identification of relevant reforms expected to be pursued (both existing and future), the Contractor must develop a strategy to integrate communications activities into the entire process for each reform measure.

Principles of reform communication have been captured by USAID in a guide on Policy Reforms Lessons Learned (See http://pdf.usaid.gov/pdf_docs/PNADE572.pdf), which provides a framework for ensuring better understanding of, and buy-in to, the reform process.

Strategic communication entails a planned, analytical approach for determining whom the Activity must involve in achieving reform objectives, and for what purpose, when, and how they must be engaged. The Activity includes a strategic communications component in order to overcome misconceptions among the public and provide useful information for stakeholders. As part of this component, the Activity will improve both the quality of information and its availability to stakeholders.

The Contractor must seek to engage relevant local stakeholders as well as to strengthen the system for effective communication and dialogue about the business enabling issues that will be the focus of Activity interventions. The Contractor must seek to strengthen the system of economic governance in Kosovo by facilitating the growth of relationships between private sector, government, civil society, and academic stakeholders as well as other interested actors. The quality of these relationships is key to upgrading and improving the overall business climate in Kosovo. By facilitating through local actors the relationships formed and capacities developed will inherently rest within the local system and will be more likely to be sustained over time.

USAID/Kosovo Economic Governance 6

This is a cross-cutting component closely related to both of the Activity’s other components, and the Contractor must closely coordinate with any future USAID activities which may also address economic corruption. In addition, interventions under this component may require significant coordination with USAID’s programming supporting civil society and media.

Expected results:

● Improved strategic communication between GOK and the general public;

● Increased opportunities for public-private dialogue;

● Enhanced outreach capacity of local media and civil society organizations;

● Increased public awareness of the existence and nature of reforms.

Defined or illustrative activities under Component One— Improved Business Enabling Environment

Potential Climate Risk

Climate Risk Rating*

1.1 Strengthen regulatory and inspection environment

Low

1.2 Support the legalization of unpermitted buildings

1.3 Improve trade regime in line with WTO principles Low

Defined or illustrative activities under Component Two— Strengthened Public Financial Management

Potential Climate Risk

Climate Risk Rating*

2.1 Strengthened MOF institutional capacity to carry-out its

functions independently

Low

2.2 Support Tax Administration of Kosovo to functionalize

compliance risk management

Low

2.3 Support TAK in making it organization structure more efficient Low

2.4 Support to TAK in implementing the VAT policy

Defined or illustrative activities under Component Three— Enhanced Strategic Communication

Potential Climate Risk

Climate Risk Rating*

3.1 Improved strategic communication between GOK and the general public

3.2 Increased opportunities for public-private dialogue

3.3 Enhanced outreach capacity of local media and civil society organizations

3.4 Increased public awareness of the existence and nature of reforms

USAID/Kosovo Economic Governance 7

● Justification for Categorical Exclusion Determination The activities under the Economic Governance Activity will not have an effect on the natural or physical environment and are among the classes of activities listed in 22 CFR 216.2(c)(2). Therefore, under §216.2(c)(1), neither an IEE nor an EA will be required for these activities. Instead, a categorical exclusion threshold determination is recommended for the following identified activities under 22 CFR 216.2(c)(2):

Activities 1.1, 1.2, 1.3, 2.1, 2.2, 2.3, 2.4, 3.1, 3.2, 3.3, 3.4 under §216.2(c)(2)(i) Education, technical assistance, or training programs except to the extent such programs include activities directly affecting the environment (such as construction of facilities, etc.);

Activities 3.1, 3.2, 3.3, 3.4 under §216.2(c)(2) (iii)Analyses, studies, academic or research workshops and meetings;

● Limitations of the Categorical Exclusion Determination:

This categorical exclusion does not cover classes of actions normally having a significant effect on the environment under §216.2(d):

i. Programs of river basin development;

ii. Irrigation and water management;

iii. Agricultural land leveling;

iv. Drainage projects;

v. Large scale agricultural mechanization;

vi. Resettlement projects;

vii. New land development;

viii. Penetration road building and road improvement;

ix. Powerplants;

x. Industrial plants; and

xi. Potable water and sewerage projects In addition, this categorical exclusion does not cover activities that:

Support project preparation, project feasibility studies, engineering design for activities listed in §216.2(d)(1);

Affect endangered species ;

Provide support to extractive industries (e.g. mining and quarrying);

Promote timber harvesting;

Lead to construction, reconstruction, rehabilitation, or renovation work;

Support agro-processing or industrial enterprises;

Provide support for regulatory permitting;

Lead to privatization of industrial facilities or infrastructure with heavily polluted property;

Assist the procurement (including payment in kind, donations, guarantees of credit) or use

(including handling, transport, fuel for transport, storage, mixing, loading, application, clean-up of spray equipment, and disposal) of pesticides or activities involving procurement, transport, use, storage, or disposal of toxic materials--pesticides cover all insecticides, fungicides, rodenticides, etc. covered under the Federal Insecticide, Fungicide, and Rodenticide Act; and/or

Procure or use genetically modified organisms.

Any of these actions would require a Europe and Eurasia Bureau Environmental Officer (BEO) approved amendment to the categorical exclusion.

● Mandatory Inclusion of Environmental Compliance Requirements in Solicitations, Awards, Budgets, and Work Plans Appropriate environmental compliance language, including limitations defined in Section 4, USAID/Kosovo Economic Governance 8 shall be incorporated into solicitations and awards for categorical exclusions.

The implementing partner shall ensure annual work plans do not prescribe activities that are defined as limitations in Section 4.

● Revisions Under §216.3(a)(9), if new information becomes available that indicates that activities covered by the categorical exclusion might be considered major and their effect significant, or if additional activities are proposed that might be considered major and their effect significant, this categorical exclusion determination will be reviewed and, if necessary, revised by the Mission Environmental Officer (MEO) with concurrence by the BEO. It is the responsibility of the USAID Contract Officer’s Representative (COR)/Agreement Officer’s Representative (AOR) to keep the MEO and BEO informed of any new information or changes in the activity that might require revision of this determination.

● Recommended Determination for Categorical Exclusion:

Approval :

James Hope, Mission Director

Date

Clearance:

Lisa Magno, Deputy Mission Director

Edmond Shyti, Acting Mission Environmental Officer

Dardane Peja, AOR/COR

Concurrence:

Mark Kamiya E&E Bureau Environmental Officer

Distribution:

IEE File MEO (to also provide a copy to AOR/COR)

Attachments: Annex A Climate Risk Screening and Management Tool for Activity/Project/Strategy Design nd Management Tool for Project Design ning and Management Tool for Project Design

CLIMATE RISKS, OPPORTUNITIES, AND ACTIONS

ing to the Mandatory Reference # Project elements may include Purpose / Sub‐purpose, Areas of Focus, or Activities / Mechanisms, etc.

3:

o‐ phy

2: Climate Risks* 3: Adaptive Capacity

4:

Climate Risk

Rating*

5:

Opportunities 6.1: Climate Risk

Management

Options

6.2: How Climate Risks Are Addressed in the

Project*

7: Next S Activity ovo de

Energy inefficient unpermitted buildings‐ cause higher energy demand for heating and cooling

Incorporate climate smart and energy efficiency policies at the

Ministry of Environment and Spatial Planning

(MESP)

LOW

•Promote good practices and policies with the Ministry of Environment and Spatial Planning

(MESP)

•Climate Smart Policies •Legislation for improved business practices tailored for climate smart policies/climate friendly growth •Energy Efficient Construction – see new EU Building Code/Green building standard

The IP will consider any information related to climate risk, if applicable.

TA presents opportunity for environmental stewardship, sustainability and CC targets.

Not applica nd Management Tool for Project Design

•Promote climate smart zoning, building codes, and land use